Sunday 22 July 2018

We must meet Asian threat to aircraft leasing lead head on

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Angela Fleming

Ireland is firmly established as the leading global hub of aircraft leasing. However, this position is under increasing threat by moves on the far side of the world where Hong Kong and Singapore are aggressively pitching for more market share.

This year, both of those countries have introduced, by way of legislative change, new and attractive incentives to the market.

In February, Singapore announced an extension to their existing aircraft leasing regime by a further five years to 2022.

Under this scheme, lessors can obtain a concessionary tax rate of 8pc on their leasing profits. This is significantly lower than the headline rate of 17pc.

Furthermore, they can obtain a withholding tax exemption on interest paid on loans used to acquire aircraft.

In March, Hong Kong proposed the introduction of a dedicated tax regime for aircraft lessors, under which a special concessionary tax rate of 8.25pc, which is half of the normal rate of 16.5pc.

Furthermore, Hong Kong-based lessors will only be taxed on 20pc of their gross rents less certain expenses.

These moves by Singapore and Hong Kong, in particular, are an effort to try to capitalise on the opportunities being generated in the Chinese market.

Recent years have seen exponential growth in air travel in Asia, particularly in China. The International Air Transport Association (IATA) predicts that by 2024 China will overtake the US as the world's largest aviation market, and will be a market of 1.3bn passengers by 2035.

As a precursor to the new regime, Hong Kong and China re-negotiated their treaty in 2015 and reduced the rate of withholding on lease rentals from 7pc to 5pc. This compares favourably to the 6pc rate that applies to rentals paid to an Irish lessor.

While the significant growth in the Asian markets presents massive opportunities for Ireland, we cannot ignore the threats posed by those jurisdictions which are competing for a bigger share of the aircraft leasing market.

Currently around 40pc of the world's commercial aircraft fleet are leased, and the IDA estimates that around 60pc of these leased aircraft are owned and managed from Ireland. Since the foundation of the GPA in the 1970's Ireland has worked hard to establish its position as the leading global hub of aircraft leasing. There are many reasons why Ireland has been so successful in this regard, including our favourable tax environment which provides for a 12.5pc rate of corporation tax on leasing profits, and tax depreciation for aircraft over an eight-year period.

In this industry, access to favourable rate of withholding tax is key. Ireland has over 70 double tax treaties, many of which have been negotiated with aircraft leasing as a target, and thus offers either zero or reduced rates of withholding tax on lease rentals.

This is a key benefit that Ireland offers over many competitors, including Singapore and Hong Kong.

This favourable tax environment is then coupled with over 40 years of aircraft leasing specialism.

This has led to an unrivalled pool of highly skilled talent, which is essential in this highly technical industry.

This talent extends not only to those employed directly by the lessors, but to the experienced professional advisers, including technical advisers, corporate service providers, non-executive directors, legal advisers, auditors and tax advisers.

The aircraft leasing industry of such significant value to Ireland that we cannot allow ourselves to become complacent.

According to the IDA the aircraft leasing industry in Ireland employs more than 1,200 people both directly through the leasing companies, and indirectly through legal, tax, audit and other professional services linked directly with the industry.

The wider aviation sector contributes more than €4bn to the economy and employs around 40,000 people when you include pilots, maintenance staff and cabin crew.

Therefore, we must continuously look for ways to protect this coveted position. This should include prioritising the negotiation of new tax treaties, particularly with emerging and key growth markets, for example Iran, Argentina, Brazil, Indonesia.

We should also look for new ways to both attract, and retain, the pool of highly skilled professionals that are the cornerstone of the Irish aircraft leasing industry.

Ireland's high marginal rate of income tax is continuously viewed by many potential investors as a significant barrier to investing in Ireland, and reform of our personal tax regime should be a priority.

The recent hints by the new Taoiseach of reducing taxation may be very welcome in this space.

We are in a position of leadership thanks to sensible policies. We need to maintain that track to stay there.

Angela Fleming is a tax director with BDO Ireland and a member of the firm's aviation finance team

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